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Schmidt Wrote:Carlitos -- We've had this discussion before with respect to demand leakages. I generally subscribe to your (Warren Mosler view) on demand leakages. However, I might want to push back a bit on Mosler's statement:
"So why the ‘demand leakages’? The lion’s share is due to tax advantages for not spending your income, including pension contributions, IRA’s, and all kinds of corporate reserves. Then there’s foreign hoards accumulated to support foreign exporters. And it all should be a very good thing- net unspent income like that means that for a given size govt our taxes can be that much lower. Personally, I’d rather have a tax cut than a policy to get other people to spend their unspent income. But that’s just me…"
Mosler's last part on rather having a "tax cut" should really have a qualifier on it. It depends on how the tax cut is distributed. The reality is the vast majority of taxes in this country are not demand leakages because the vast majority of taxed money is immediately spent on goods and services for the public welfare. State and local sales and property taxes, for example, are essentially PAYGO (pay as you go) to fund all the services that communities need. And now even the Social Security and Medicare programs are essentially PAYGO with the trust funds being drawn down, these also would no longer be called demand leakages (except for the past money that remains drawing interest).
Generally speaking, taxes are considered part of demand leakages. But I understand the problem you have with that.
Here's maybe one way to get your mind to see it right:
If we think about the faucet, sink, and drain example, with the faucet being government spending/lending(including lending by agents of the government), the water in the sink being the dollars in the economy, and the drain being the demand leakages, if it helps, you could add in little pipes that capture some of the water going down the drain and pump it back to the faucet, that would be the tax revenue flowing back to the government. You could also add in other pipes that capture loan repayments to the government and the agents of the government, and pipe that back to flow back out of the faucet as well. But the water in the pipes is not 'in the sink', it's outside of the sink, and there's always going to be this water outside of the sink in those pipes, as this thing has a continuous flow, or there would be no water in the sink and therefore nothing going out the drain. So there's always this leakage or flow back into government accounts. The dollars collected in tax revenue are not spent immediately; there's a lag in the real world, where the government accounts pool the dollars before being spent back into the economy. Same goes for loan repayments.
The danger is taking this example too literal. Water is a finite resource, and in the real world what goes down drains is what comes out of faucets. So you have to think of the water being drained and not piped back as going nowhere, and some portion of the water coming out of the faucet as being from an unlimited source of water (which is the original source of all the water in and flowing out of the system).
The high federal taxes of the 1950s and 60s that went to building our interstate highway system and other public projects like putting a man on the moon added to our prosperity at that time and kept unemployment low.
Back in those days, we didn't run trade deficits and foreigners weren't draining dollars out of the system. Opposite was the case, we had trade surpluses and were collecting foreign currency and gold. Inflation was also more of problem in those days as well, as export economies have a natural inflationary bias due to the fact that real resources are drained from the domestic economy.
We also didn’t have a giant rent seeking, parasitic, exotic financial system. But a bunch of racist vanilla banks.
I cannot help but observe that the "political winner" of always cutting taxes over the past several decades has resulted in our current dilemma of not having enough revenue to fund infrastructure or other goods and services for the public good. The MMT view would be that deficit spending should be encouraged to make up the shortfall, but can such large deficits really be maintained indefinitely just so the private sector can enjoy low taxes? And if those tax cuts accrue more to the rich and corporations (e.g. Bush tax cuts and Trump tax cuts) don't they result in more demand leakages as the money does not trickle down into the economy? Some is parked in overseas accounts or go to personal savings of the rich. Bruce Bartlett wrote an article in 2013, The Bush Tax Cut Failure. In a few years, he and others will be writing a similar article about the Trump Tax Cut Failure.
If a tax increase just removes savings from the economy, what was the point of the tax?
There are other purposes for taxes beside aggregate demand managements, and reducing wealth inequality can be a legitimate purpose, but I would rather focus on the "pre-distribution" and the government actions/interventions that enable the super wealthy to become so wealthy in the first place. Clawing back inequality with one hand, caused by government actions with the other hand, is not an efficient way of doing things. Once the wealthy become wealthy they will fight those tax increases tooth and nail and corrupt the political process to prevent them. America's super wealthy are the largest welfare queens in human history on the face of the planet. No nation has ever given so much to so few for so little in return.
Also, a bit of history, it's probably Warren Mosler's fault we got the 2nd Bush Tax Cut. Back in 2003, the Bush admin was contemplating another round of tax cuts, but there was unease about what it would do to the deficit. Andy Card brought Warren Mosler to the White House to explain MMT and he advocated for a payroll tax cut (which is the type of bottom up tax cut he favors, not the trickle down supply side nonsense). They didn't do a payroll tax cut, but not a week after the meeting, Bush was on TV saying "I don't worry about numbers on pieces of paper, I worry about jobs!" He was channeling Abba Lerner and probably didn't know it. Bush would not veto a single spending bill thru the rest of his presidency.
You also ask if deficit can be maintained indefinitely? So long as the domestic and foreign sectors attempt to net-save as a whole, the government will always run deficits.
Throw in the fact that the deficits and debt have become a political football, and we seem destined to have shoddy infrastructure forever because "we cannot afford" to spend otherwise. I for one have no problem paying higher taxes as long as I can see it being spent for the public good.
The point that I am making and asking: In the MMT view, is there a bottom floor on taxes such that lowering them further is no longer beneficial to the economy? It would seem to me we passed that point already because we cannot extract ourselves mentally from thinking of federal budgets as household budgets. That's the reality no matter what Mosler says about "rather having a tax cut". It perhaps made sense when we had the high tax levels of the 1950s and 60s, but does it make sense now when we are already in a perpetual deficit spending mode and not having the political will to spend on projects for the common good because "we cannot afford it".
My opinion..
If taxes were zero, we wouldn't have a credible taxation regime and inflation would spiral until the currency was rejected by users. The government would then not be able to provision itself thru spending the dollars, as there would be no takers willing to sell the government stuff or labor for dollars.
I don't share your pessimism. People were taught the deficit terrorist nonsense, which is not unlike the propaganda in the Soviet Union or other Communist countries. They told their citizens what to think too, but as Lincoln reminded us "you can't fool all of the people all of the time."
I don't think I addressed all of your comments directly, but let me know if this has helped.